Debtor Protection and Business Dynamism

Abstract

We study the effect of debtor protection on business dynamism. We find that greater debtor protection, in the form of more lenient personal bankruptcy laws, increases firm entry only in sectors requiring low startup capital. We also find that debtor protection increases firm exit and job destruction rates among young small firms. This negative effect takes three years to materialize, and is persistent in time. Finally, we provide evidence consistent with two mechanisms underlying these changes in business dynamism: a reduction in credit supply and entry of lower quality firms following increases in debtor protection.

Keywords: Debtor Protection, Personal Bankruptcy, Entrepreneurship, Business Dynamism, Firm Dynamics

JEL Classification: G33, K35, M13